Residential Property – Smart Investment?

Aug11

Has the time come where you are starting to think about how you can build greater wealth for yourself or your family? Is Property what you are leaning towards? Taking into account the positive media around growing values and one’s own observations about how prices have increased over time, it’s only logical that property would be a serious consideration. But are all things equal when it comes to property?

Property Investment Returns

Just like other investment classes, when it comes to investing in residential property, you get the two types of returns – Capital Growth (Value) and Rental Income (Yield). Just because property is a physical thing you can see and touch, one must not lose sight of the fact that it must provide the investor with a return on their investment. This is especially important because as an investor in property, you need to also take into consideration the holding costs of the investment such as interest on any loans and costs in maintaining the asset in a good leasing condition.

One therefore needs to be mindful that these costs of maintaining the property are an extra investment cost compared to owning shares in a company, as an example, where such costs don’t exist. Factoring in these considerations as part of your return on investment goals is very important when working out your overall potential investment returns.

Investing, Speculating or Working for your Return

Property renovation is the flavour of the year when it comes to TV. High rating shows like The Block and House Rules engage audiences around the work, the challenges and ultimately the emotion around the pressure it puts on relationships. Then when these series come to an end, we see the value gains that have occurred, especially in The Block, and we can all get carried away with the levels of profit being made.

These shows are an example of what I call ‘Working’ for a return on their money and it’s the same with any type of renovation or building undertaken to investment properties. You can be completely hands on and do it all yourself or you can outsource the whole project including the project management of the job, but you are still going to be required to allocate some time to trying to manufacture a return or gain on your money outlaid. That’s why I don’t consider this to be investing but rather taking on a second job to build wealth.

There is certainly money to be made with this strategy, but you must understand what you are doing and the risk/reward principals attached because you are going to outlay more money than just buying the property, as you are attempting to add value. It’s an option for some, and these are people who actually enjoy doing this type of work.

Speculating in property is also what some people try once, as they chase a quick win or gain. It’s usually related to booming areas where mining expansion and capital investment activity are underway causing a shortage of accommodation. This shortage, combined with the high wages offered for working remotely, can make values grow quickly too. But with every boom there comes a slow down and these slowdowns or bust cause very highly levels of value and rental income volatility. It’s a high risk high reward strategy and, more often than not, when speculating in property there are more losers than winners, as most people who attempt this strategy are inexperienced or don’t understand the economic drivers at play well enough. Other examples of speculation in city locations include the pending announcement of major infrastructure projects, such as airports, new rail lines, by-passes and so forth. Many get seduced into thinking any of these projects will allow them to turn a quick profit on property, yet delays or new governments canning projects could again see property returns fall flat. So the message is be careful when it comes to speculation and understand the risks.

‘True’ investors are those who see opportunity and value in the area and property they are looking to invest in. Furthermore they appreciate that property investment is for the long term, not the short term. And by long term I’m talking about a period of 20 years or more.

Holding a property investment asset for this long gives the property time to appreciate in value, whilst also enjoying the increased rental returns. Also, over this timeframe, the investor should be close to having any money they borrowed to purchase the property paid off, and this in turn means that the passive income coming from the property is income that will be going toward supporting their endeavours to be self funded retirees into the future.

Over this long period the really savvy and smart investor works out that this passive income combined with the steady increase in value provides them with consistent income and a stronger wealth base at retirement. These investors opt not to sell the property at all and just live off this income and by doing so avoid any capital gain tax they would have to pay if they did choose to sell. By these actions they have built up value in their estate which could potentially provide a legacy to future generations.

Author: Ben Kingsley

About the Author: Ben Kingsley is the founder & CEO of Empower Wealth – a specialist property investment advisory firm in Melbourne. He is a Qualified Property Investment Adviser QPIA, Licensed Real Estate Agent (Buyers Agent) in VIC, NSW and QLD and licensed Finance Broker. He is also the Chair of the Property Investment Professionals of Australia – the peak industry association for property investment specialists.